Survey on the “French Telecom Economics” 2012 edition

Survey on the “French Telecom Economics”2012 edition

Fédération Française des Télécoms / Arthur D. Little

November, 2012

2

1 The telecom industry is at the core of society and economy.

2 Telecoms are a major driver in the development of the digital economy.

3 In France, telecom operators’ performance is declining under strong regulatory, fiscal and competitive pressures.

4 An ambitious and consistent industrial policy for telecoms is required at both French and European levels.

Survey on the “French Telecom Economics” (period 2006-2011)

3

Less than3% of French households’ spending

dedicated to telecom services

50

Telecoms, at the core of society and economy

Over 3/4 of French people

have a mobile phone and an internet access

€204 B injected in the French economy

since 2006

Over 300,000direct and indirect telecom jobsbased in France

8% decrease in telecom prices

since 2006

vs. inflation of +10%

€39 B invested in telecom networks

since 2006

3

4

Telecom services are now almost universal in French society: more than 85% of thepopulation equipped with a mobile and 76% having an internet access.

Penetration rate of internet access(2)Mobile equipment rate(1)

2006 2007 2008 2009 2010 2011

85%83%82%78%

75%74%

+11 points

Source: CREDOC, OECD, Arthur D. Little analysis (1) French people over 12 years with one mobile phone or more

(2) Fixed and mobile

2006 2007 2008 2009 2010 2011

+35 points

76%74%69%

62%55%

41%

% of French households% of French population

1 At the core of society and economy

5

Telecoms are a priority for the French population, French investors and French publicrepresentatives.

2 - Mains levers to improve attractivityof French cities for foreign investors

3- Priority equipment for rural towns1 - Main saving items

according to households

% mayors questionedIf needed, on which item would you cutyour spending in priority?

What are the key levers that French cities should use to increase their competitiveness in Europe?

None 4%

Telecoms 1%

Health & insurance 2%

Energy 2%

Transport 2%

Food 7%

Home equipement 14%

Clothing 21%

Leisure 47%

42%

Post offices 16%

34%Medical houses

3G telephony

23%Theaters

Sports equipments 19%

Roads 45%

Schools 52%

Fixed broadband 78%

8%

11%

13%

37%

13%

37%

1%

22%

30%

Internationally renowned universities

First-class transport and telecom infrastructures

Innovative business areas

Excellent quality of life

Public equipment and urban development projects

International advertising campaigns

Quality health equipment and services

Major sports and cultural events

None


Source: fig. 1: CSA polling institute, fig. 2: Barometer of France’s attractiveness, fig. 3: Survey by the Association of French rural mayors, Arthur D. Little analysis

6

Fixed telephony volumes in France

Mobile telephonyvolumes in France

Number of SMS in France

Mobile data traffic in France

Telecom usage keeps on growing at a very rapid pace: +11% in mobile voice minutes,+69% in data traffic and +10 billion text messages in France over last year.

Source: ARCEP - French Telecom NRA, Arthur D. Little analysis

29.726.8

94.0

106.1

+13%

+11%

2Q122Q1120112006

B minutesB minutes

45.7

35.5

146.0

15.1

+870%

+29%

2Q122Q1120112006

B SMS B Mo

+10 billion of SMS

23.0

13.7

58.6

0.5

+69%

2Q122Q112006 2011

x127

27.728.1

113.5

105.7

+7%

-1%

2Q122Q1120112006


7

Telecom services represent less than 3% of French households’ spending and have remainedstable since 2006.

French households’ spending breakdown(1)

€B

(1) Final household spending(2) Including postal services and education(3) Excluding telephony devices(4) Including telephony, fax, TV & radio, computer and photography devices(5) Excluding social security

100%

2011

1 017

Housing, electricity & gas

Transport

Food

Hotels & restaurants

Leisure & culture

Furniture

Clothing

Health

Alcohol & tobacco

Digital devices

Telecom services

Other

(3)

(2)

(5)

(4)

Share in spending %

11.1%

13.3%

13.5%

23.6%

6.0%

6.8%

6.9%

4.2%

4.5%

3.0%4.4%

2.7%

Source: National Institute of Statistics and Economic Studies (INSEE),

Arthur D. Little analysis

+1.7 pts

2011

0,5%

1,9%

2,1%

2.7%

4.4%

2006

0,2%

1,1%1,3%

2.6%

2.7%

Telecom services

Of which

Digital devices

Radio & TV setsComputerMobile devices

Relative growth% of spending in constant euros

+0.1 pts


8

The prices of telecom services are decreasing, contrary to other major French households’spending.

Price index of major services for French households

On a basis of 100 in 2006

112

107

116117

114

92

110

201120102009200820072006

136

140

2012(1)

90

95

100

105

110

115

Electricity

Mail

Rail

Tolls

Fixed and mobile telecom services

Financial

services

+ 36%

+ 17%

+ 14%

+ 16%

+ 12%

+ 7%

-8%

Gas

(1) 1H2012 average, except for tolls (increased as of Feb. 1st, 2012)Source: National Institute of Statistics and Economic Studies (INSEE),

Ministry of Transportation, Arthur D. Little analysis

Inflation + 10%


9

Telecom operators are the main private investors in infrastructure in France with €39 Binvested in telecom networks over the last 6 years.

Source : ARCEP – French Telecom NRA, Association des

Sociétés Françaises d’Autoroutes (ASFA), RFF, RTE, ERDF,


Telcos’ investment in France between 2006 and 2011

€ B

3.22.4

2.42.2

2.4 2.4

Fixed

Mobile

2011

7.0

4.6

2010

6.8

4.4

2009

5.9

3.7

2008

6.5

4.1

2007

6.2

3.8

2006

7.0

3.8 €24.4 B

€15 B

Total 2006-2011: €39.4 B

1.8

3.2

6.6

HighwaysRailElectricity

networks

3.3(2)

Telecoms

Investment in infrastructures in France

Yearly average over 6 years, for the period 2006-2011, € B(1)

Telecoms, 1st private investor

in infrastructures in France

(1) Telecoms: France Télécom, SFR, Bouygues Telecom, Iliad; Electricity: RTE et ERDF;

Réseau Ferré de France: special status; Highways: ASFA (Sanef, SAPN, ASF, APRR….)

(2) Average on 5 years (2006-2011)

Excl. mobile spectrum


10

Source: Diane, ARCEP – French Telecom NRA, Arthur D. Little analysis

The telecom industry supports employment with 128,000 direct jobs based in France.

Direct jobs from telecom operators in France

Thousands of jobs based in France

(1) 2010 data in case 2011 data are not available(2) By top revenues in France: France Telecom, SFR, Bouygues Telecom, Iliad, Numericable(3) By top revenues in France: Alcatel-Lucent, Nokia Siemens Networks, Cisco, Ericsson, Huawei

(4) By top revenues in France: Samsung, Apple, Nokia, LG et RIM(5) By top revenues in France: France Télévisions, Canal +, TF1, M6, Radio France(6) Google, Facebook, Yahoo, Microsoft et Amazon

128126

124126

130133

2006 2007 2008 2009 2010 2011

Jobs in the IT digital ecosystem in France

Thousands of jobs based in France(1)

5 telecom

operators(2)

128.0133.0

5 internet

players (OTT) (6)

3.11.8

5 content

providers(5)

22.314.0

5 device

manuf.(4)

1.90.7

5 equipment

vendors(3)

11.618.3

2011

2006

Estimate: indirect jobs equal to direct jobs

in the telecom industry


11

Telecom operators paid €19 B in income taxes, licenses and industry-specific taxes between2006 and 2011.

Industry-specific taxespaid by operators(2)

Amounts spentto purchase spectrum

Income tax paid byFrench telecom operators

€ BAggregate 2006-2011, in €B € B

3G

2010

0.582

4G

(800 Mhz)

2012

2.600

4G

(2.6 Ghz)

2011

0.944

2006-2011 total

€1.5 B2006-2011 total

€3.6 B(3)

14.1

2006-2011 total

€14 B

Source: ARCEP – French Telecom NRA, FFTélécoms, annual reports, Les Echos,


(1) Fiscal group France(2) Fiscal group France Orange, SFR and Bouygues Télécom(3) Assumption: IFER set up in 2010 and telecom tax in 2009

(4) TST / COSIP / copyright levy, VoD

200 230 233 239

264 253

191170

0

239

2009

543

212

92

2008

26633

2007

2300

2006

200

2011

1.210

531

235

2010

1.191

518

IFER (Flat-rate tax

on network industries)

Management levies

(frequencies)

Telecom tax

Other(4)

(1)


12

11%

37%

23%

10%

19%

In total, telecom operators injected €204 B in the French economy between 2006 and 2011.

Source: companies, Arthur D. Little analysis

Private shareholders

Telecom operators paid €20B to their private shareholders.

Direct and indirect jobs

Telecom operators paid €76B in salaries and benefits for direct and indirect jobs.(1)

Other suppliers / outsourcing

Telecom operators spent €46Bin other types of expenditures(marketing, distribution,...).

French State

Telecom operators paid€23B to the State in taxes (excl. VAT), licenses and dividends.

Between 2006 and 2011…

Networks

Telecom operators invested€39B in the roll-out, upgrade and maintenance of theirtelecom networks.

(1) Salaries and social charges


13






1450

Telecoms, major driver of digital growth

Growth of the digital ecosystem since 2006:

+49% worldwide

vs. +7% in Europe

Share of telecoms in the Frenchdigital ecosystem:

77% of jobs

92% of investments

Investment of telecom operatorsin very high speed broadband in France:

a potential of over 1 pointof additionnal GDP

benefiting the French economy

Share of telecoms in the global digital ecosystem:

70% of investments

14

15

Globally, the digital sector is sharply growing across all segments.

Revenue evolution of the digital ecosystem by sub-sector(1)

$B

+152%

+10%

+42%

+19%

Growth2006-2011

(1) Top 30 per category by 2011 revenues

+68%

+49%

Equipment vendors

Device manufacturers

Content providers

Internet players

2011

3,332

1,405

179

1,286

305

157

29997

2008

2,817

1,242

181

987

32087

2007

2,619

1,173

177

889

30278

2006

2,243

987

150

765

27962

1,007

2,819

1,251

166

Network operators

2010

3,066

1,297

173

1,175

301

121

2009

Examples of companies

2 Major driver of digital growth

Source: Thomson Reuters, Arthur D. Little analysis

16

In Europe, revenues of the digital ecosystem are stalling - contrary to North America and Asia.

Revenue evolution of the digital ecosystem by region(1)(2)

$ B Growth 2006-2011

+118%

+7%

+73%

+51%

+58%

South America

Europe

but -9% since 2007

Oceania

Asia

North America32

37 6642 45

2011

3,333

1,155

1,446

27

2010

3,067

1,025

1,312

21

2009

2,820

937

1,165

70

21

2008

2,817

954

1,117

North America

24

2007

2,619

893

968Oceania

Asia

20

2006

2,243

762

837

Europe

South America

17

594 696 686 652 643 635



(2) Nationality according to HQ location


17

Globally, telecom operators generate the vast majority of investments, whereas devicemanufacturers and internet players capture more and more value.

+1 pt-1 pt+0 pt

-1 pt

+0 pt

Internet

players

3%2%

Content

providers

5%6%

Equipment

vendors

2%2%

Device

manuf.

20%21%

Network

operators

70%70%

12%

+16 pts

-9 pts

-7 pts+7 pts

-3 pts

5%10%

17%

4%7%

26%

13%

48%

57%

20112006 2006 2011

Free cash flows by sub-sector(1)

% of total free cash flows of the ecosystem

Investment share by sub-sector(1)

% of total investment of the ecosystem


Source: Thomson Reuters, Arthur D. Little analysis (1) Top 30 per category by 2011 revenues

Internet

players

Content

providers

Equipment

vendors

Device

manuf.

Network

operators

18

Globally, market capitalisation reflects the value capture of players within the digitalecosystem.

202

81

56

159

99

40

60

80

100

120

140

160

180

200

220

2011 2012(2)20102009200820072006

Total

Network operators

Device manuf.

Equipment vendors

Content providers

Internet players +102%

-19%

-44%

-1%

114+14%

Basis of 100 in 2006

Market capitalisation by sub-sector(1)

+59%



(2) As of Sept. 28th, 2012


19

In France, telecom operators are the main contributors in terms of revenue, employment,taxes and investments - by far.

Revenues, jobs, taxes and investments of 5 players by sub-sector – in 2011 and in France

Revenues(1): €68 B

Taxes and licenses(2):€7.1 B

(1) Revenue reported for France or disclosed in the press, some adjusted data to estimate actual revenue generated on French market(2) Income tax, other taxes excl. VAT, licenses and industry-specific taxation

3) Excl. licenses, if data for France unavailable then estimated with prorata of jobs in France

Direct jobs: 167,000

Investments(3): €7.6 B

8%

14%

11%

3%64%

1%

4%

2%1%

92%

5 network operators 5 equipment vendors 5 device manufacturers 5 internet players (OTT)5 content players

2%13%

1%7%

77%

1%10%

1%1%

88%

Source: ARCEP – French Telecom NRA, Diane,

Reuters, annual reports, Arthur D. Little analysis


20

� Support to start-ups in communication services e.g.:

Nationally as well as globally, telecom operators are key players in the development ofpotential « sectors of tomorrow » in the growing digital ecosystem.

Cloud computing Contactless payment E-health Support to start-ups

� Association Française du Sans Contact Mobile (AFSCM) initiated by Orange, SFR et Bouygues Telecom

– Over 1 million Cityzi mobile handsetsdistributed in France by 1H12

– Objective of 2.5 million by end of 2012

� Creation of electronicwallet solution

� Illustrative services:

– Medical imaging throughcloud

– Partnership for management of chronicdiseases, mobile assistance …

� Orange’s 2020 objective for access to digital healthapplications(1):

– 1/3 of EU hospitals

– 20% of EU citizens

Strategic partnership

Public funding: €75M

Public funding: €75M

Strategic partnerships

Selected examples

1) Orange’s “10 commitments” contributing to implement EU’s Digital Agenda

� Investment fund in start-ups such as:

Technocom 2

� Investment fund in start-ups with focus on digital developments in networks, energy, smart home and health


Source: companies, Arthur D. Little analysis

21

Through their broadband investments, telecom operators can contribute to the economicrecovery by generating over 1 point of additionnal GDP growth in France.

~€6.2B investment in 4G

(excluding licenses)in the coming 5 years

+0.46 point extra GDP(1)

(1) According to Ericsson (« Socioeconomic effects of broadband speeds »,

September 2011) in a survey focused on OECD countries

(2) According to Capital Economics (« Mobile Broadband and the UK Economy »,

April 2012) addressing the UK market

Impact of investment in mobile and fixed broadband in France directly or through the digital ecosystem and improvement of competitiveness of companies

~€20 to €30Binvestment in fiber

in the coming 15 years

Fixed broadband throughput X5 in equipped households

(from 20 Mbps to 100 Mbps)

+0.75 point

extra GDP(1)

Investing ~€5B in 4G would yield 0.37 point

of additional GDP2)

Doubling the broadband speed for an economy increases GDPby 0.3 point(1)


Source: ARCEP, Tactis, IDATE, Capital Economics, Arthur D. Little analysis

22






23

Expected trend of French telcos’ EBITDAuntil 2014

-5 points50

Sharp drop in telecom operators’ performance

Market capitalisation of European telecom operators since 2006

-28%

€1.2 B of industry-specific taxation

paid by telcos each year in France

€15 B of revenue loss

for French telecom operators due to decreases in mobile termination rates and roaming charges

since 2006

Expected trend of French telcos’ revenuesuntil 2014

-9%

Telcos’ mobile revenues that may be captured by internet players

7.5%23

24

Contrary to other regions in the world, the European telecom industry has hardly grown in 5years, which implied a sharp drop in its value.

Source: Thomson Reuters, World Bank,


Market cap of network operators by region(1)

72

107

118

99

2012(2)201120102009200820072006

Dow Jones

Industrial

World

Asia

North America

Europe

117

100100100100

+18%

+7%

-28%

Revenues of network operators by region(1)

108

156

172

142

2006 2007 2008 2009 2010 2011

100

World

Asia

North America

Europe

100100

+72%

+56%

+8%

European telcos’ value has shrunk by 28%between 2006 and 2012(2)

Telco’s revenue growth is 7 to 9 times lowerin Europe than in Asia and North America

+42%

-1%

3 French telcos facing strong pressures

+17%

Basis of 100 in 2006 Basis of 100 in 2006

(1) In top 30 global operators, nationality according to HQ location

Revenue growth of Australian and South American network operators is respectively 13% and 26%

(2) Value as of Sept. 28th, 2012

25

The decrease in revenues is stronger in France than in other European countries and in otherparts of the world.

Source: Bank of America Merrill Lynch, ARCEP, Arthur D. Little analysis

Mobile revenue growth4Q11 vs. 4Q10

Revenue growth in %

France(1)

-5.3%

Europe

-4.0%

Asia Pacific

0.2%

North

America

5.0%

Fixed revenue growth(2)

2011 vs. 2010

Revenue growth in %

France

-2.7%

UK

-2.2%

Canada

4.6%

US

11.3%

(1) Retail market revenues (source: ARCEP – French telecom NRA)

(2) 3 main wireline operators (USA: AT&T, Verizon, Sprint; Canada: BCE, Telus, Shaw

Communications; UK: BT, Virgin Media, TalkTalk; France: Orange France, SFR, Iliad)


26

In France, telecom operators’ revenues and margins are expected to sharply decrease until 2014.

Aggregated revenues of main telcos(1) in France

€ B

45

40

35

30

2014e2013e2012e2011201020092008

-9%

-2%+4%

38.839.5

41.0

42.643.643.4

41.9

(1) Orange France, SFR, Bouygues Telecom, Iliad

Analyst consensus

% revenues

Aggregated EBITDA margin of main telcos(1) in France

40%

30%

20%

2014e2013e2012e2011201020092008

-14%

-9%

29.2%29.8%30.9%

34.0%34.3%35.1%

37.5%

Analyst consensus

Revenuesas of 1H12:€20.7 B

EBITDA as of1H12:32.9%


Source: Citigroup, HSBC, Exane, Natixis, Credit Suisse, JP Morgan, Deutsche Bank,


27

Margin decline will negatively impact investment capacity as illustrated by the case of the UK market.

Case of UK – Mobile and fixed(1)

Source: Bank of America Merrill Lynch, Arthur D. Little analysis (1) Mobile: Vodafone, O2, Orange / T-Mobile, Three; Fixed: BT only


EBITDA / Revenue (%) Investment / Revenue (%)


72

100

20112006

-28.3%

94100

20112006

-6.3%


28

Operational cash flows of French telcos are in the same range as those of other majorFrench companies.

-2%

1%2%3%3%3%

4%4%5%5%5%6%

7%7%8%8%9%9%9%9%

10%10%

12%12%

13%

13%13%

14%

16%17%17%

17%18%

20%

21%

27%

Technip

Renault

Safr

an

Lafa

rge

Tota

l

Als

tom

Arc

elo

r

Sain

t G

obain

Bouyg

ues

Carr

efo

ur

Vallo

ure

c

Veolia

ED

F

Peugeot

EA

DS

ST

Mic

roele

ctr

onic

s

PP

R

Vin

ci

Air L

iquid

e

Schneid

er

Ele

ctr

ic

SF

R

Essilo

r

L’O

réal

Public

is

Fra

nce T

élé

co

m

LV

MH

Viv

endi

Legra

nd

Pern

od R

icard

23%

Sanofi

Capgem

ini

Bo

uyg

ues T

ele

co

m

Alc

ate

l Lucent

Mic

helin

GD

F S

uez

Accor

Danone

%

(EBITDA – CAPEX) / RevenueCAC 40, 2011

Source: Thomson Reuters, operators, Arthur D. Little analysis


29

Market value is negatively impacted by declining performance, which may open the door tobids by foreign players.


Source: Reuters, KPN, Infinancials.com, Morgan Stanley, analyse Arthur D. Little

4.5

5.8

Verizon

7.5

Iliad

9.8

At&T

10.2

4.9

8.3

Bouygues

Group

3.5

Vivendi

Group

4.0

FT

4.0

KPN

4.4

DT

(1) Bouygues Group and Vivendi Group used as proxies

for Bouygues Telecom and SFR

(2) As of Sept. 28th, 2012

Compared value of selected US and European telcos(1)

Enterprise Value(2) / EBITDA 2011

America Movilbid in 2012

Share of revenue in Europe

NA NA 53% 73% 90%100% 69% 83%100%

European telecomaverage

US telecom average

30

The French telcos’ drop in performance can be explained by the deterioration of theregulatory and fiscal context as well as through a tougher competition.

Fra

nce

Inte

rnati

on

al

Competition

Source: Arthur D. Little analysis

Regulation Taxation

Growth of low-cost model

� Model based on lightercustomer management with

limited distribution footprint, no

handset subsidizing

� Lower prices impactingprofitability, investments, jobs and quality of service

National over-taxation

� Taxing telecom operators to

benefit sectors in turmoil

instead of investing in telecom

innovative infrastructure and

services

Competition of over-the-top players (OTT)

� Development of these players: Integration of communication

channels (telephony, SMS,

videocalling, video …)

� Customer relations partiallycaptured through closedecosystems (Apple, Google…)

Tax optimisation by otherplayers

� Unfair taxation compared to global internet companiesthat use tax loopholes in Europe

e.g. VAT in Luxembourg and

income tax in Ireland

National regulation

� Regulatory pressure (loi Chatel,

decision on VAS…)

� Gradual implementation of the national regularoty frameworkfor investments (LTE, fiber)

compared to policies followed by

other countries (Japan, S. Korea,

USA…)

European regulation

� Regulatory pressure aiming attariff decrease (interconnection,

voice & data roaming)


31

Source: ARCEP, Arthur D. Little analys

Regulation: since 2006, decreases in termination rates and roaming tariffs have reducedtelcos’ revenues in France by ~€15 B.

Impact of decreases in MTR and roaming charges (1) on telecom operators’ revenues (2) in France

(1) Roaming-in and roaming-out

(2) Gap analysis with same volumes vs. case where MTR

and roaming charges would have remained flat since 2006

Strongdecrease in

roaming tariffsin 2012

-585

-635

-814

-901

Impact of roaming

charges decrease

Impact of MTR decrease

2011

-4,949

-4,048

2010

-3,764

-2,950

2009

-2,984

-2,348

2008

-1,867

-1,283

2007

-1,114

-274

-840

€ M

Total 2006-2011: ~€14.7 B


32

Source: FFTélécoms, Reuters, Durieux report,

Upnext Research, press

Taxation: telecom operators in France suffer from an industry-specific taxation of €1.2 B per year,i.e. much higher than the one in force in the 4 largest countries in Europe and in the USA.

Main industry-specific taxes for telecoms(1) in 2011 Telecom industry-specific taxation

TST / COSIP(3)

Copyright levy, VoD

“Telecom Tax”

1,211

253

41

150

235

127

405 IFER copper(2)

Taxes

€MFinancing…

Regions

End of advertising on

France Télévisions

Cinema (CNC) and TV

Cinema, right holders

State

Regions, cities

Total: €1.2 B per year

i.e 15% to 20% of annual investments

% of 2010 revenues

2.79%

UK

0.06%

Germany

0.12%

US

0.81%

Spain

1.79%

Italy

1.95%

France

(1) On the perimeter of FFTélécoms members

(2) IFER: Flat-rate tax on network industries

(3) TST: Tax on TV services, used for COSIP (Compte de Soutien à l’Industrie des Programmes Audiovisuels)

Management charge

(frequencies)

IFER antennae


33

Taxation: unlike telecom operators, global internet players choose to benefit from tax loopholesin Europe.

Source: Greenwich Consulting, French Digital Council, Marini Bill, Arthur D. Little analysis

Tax optimisation mechanisms used by some global internet companies

From 2019 onwards, VAT will be fully due in the country of end consumption.

�€300 M of VAT lossfor France on electronic

services in 2008

� €600 M expected in 2014

� Only €12 M of income tax

paid by « GAFA »(1)

companies in France in 2011

VAT Income tax

(1) Google, Apple, Facebook, Amazon

(2) Fiscal group France

Country of end

consumptionCountry

of taxation

Ireland

Luxembourg

GAFA

0.16%

Opérateurs

5.78%

Income tax paid in France

2011, % of revenuesExamples


(2)

34

Competition: on mobile and fixed markets, French prices are the lowest, when compared tothe 4 largest countries in Europe and compared to the USA.

Source: operators, Arthur D. Little analysis

78

67

50

4238

20

Price of a comparable mobile offer(1) Price of a comparable fixed offer(2)

€ per month, October 2012 € per month, October 2012

77

56

4843

40

32

(1) Unlimited voice (min. 500 minutes), unlimited SMS/MMS (min.1000 SMS,) Internet 1, 2 or 3 Go; SIM only,

tethering when available, no contract when available, operators having a market share > 15%;

(2) Unlimited fixed national calls (min. 3000 minutes), broadband with no fair usage for heavy users when available,TV; excluding cablecos


35

Competition: new type of competition by over-the-top players is becoming a reality,especially in France on TV and VoD services.

Source: Exane BNP Paribas, Sandvine Intelligent Broadband Networks, press, Arthur D. Little analysis

VoiceSMS/IM

Video calls Video

Whatsapp: 5% of instant messages in

the world as of November 2011

Netflix: 33% of US peak time traffic

in 2011

Skype: 254 million active users in the world, 20% of calls globally and 33% of international calls

OTT services may capture up to 7.5% mobile revenues by inhabitant in Europe by 2015.


36






37

An ambitious and consistent industrial policy for telecoms is required

in France and in Europe

38

Re-building an industrial policy is paramount in order to foster investment and growth in thetelecom industry.

Source: Arthur D. Little analysis

4 Need for a new industrial policy for telecoms

Consumerist approach (new licenses, lower MTR & roaming charges)License auctionsNetwork unbundlingNet neutralityInternat. internet players not regulated

First equipmentof individuals

and homes

Broadband for all

Mobile telephony

Internet

TV

Fiber

Mobile internet

Smartphones

?

Very high speed broadband

4G

ADSL boxes

Digital growth areas

1990 2000 2012

Markets open for competition« Beauty contests » for licensesTariff asymmetryHigh MTR and roaming to finance network investmentInternat. internet players not regulated

Which regulatory and fiscal frameworkto foster next generation networks?

Which industrial policy to develop veryhigh speed broadband as well as

new digital services?

Connected objects

39

So far, initiatives to support the digital economy have remained patchy and heterogeneous.

Initiatives in France Initiatives in Europe

Government Digital Plan

� Very high speed broadband for all by 2022

� Development of digital services in education, health, administration

� “Paris Capital Numérique”, high-tech cluster gathering start-up companies, universities and investors on the same location

Digital Agenda for Europe

� Broadband target: >30 Mbps for all and > 100 Mbps for at least 50% of households by 2020

� Doubling public investment of Member States to €11 B in ICT R&D

� Digital inclusion (increase regular internet use to 75% by 2015)

� eGovernment: 50% of citizens using it by 2015

� …

Source: French government, EU, Arthur D. Little analysis

Programme “Investments for the future”: digital part

� Innovative digital services, usages and contents

– Digitization of scientific, education and cultural contents

– Cloud Computing (€150 M funding by the French State)

� Support to private investments in fiber

� Smart grid (innovative energy networks)

Europe 2020 project bond initiative

� Pilot phase starting with €230 M for strategic infrastructure investments

� Targeted sectors: telecoms, transport, energy

� Expected private investment: up to €4.6 B due to a x15-x20 multiplier effect

EU infrastructure funds: “Connecting Europe Facility” (European Commission proposal)

� €50 B of which €9.2 B for telecoms

On Oct. 9th, 2012, the French government announced measures promoting employment & investment in telecoms

� Observatory of investment in mobile networks

� Incentives to speed-up 4G roll-out

� Operators’ commitments for France-based jobs in call centers

� Update of rules regarding handset subsidizing


40

3 priorities for France and Europe to invest and create jobs in the telecom sector:

Ensure and support continued investment in the telecom infrastructuresof tomorrow

Create a level playing field for competition and negotiationsbetween telecom operators and global internet players

Support the creation of new digital growth areas around telecomoperators at the benefit of the “sectors of tomorrow”

Priority #1

Priority #2

Priority #3

Source: FFTélécoms


41

3 priorities for France and Europe: detailed actions to be implemented

1. Continued investment in networks

� Tax incentives for investment

– Public stimulation of demand through taxincentives for very high speed broadbandconnection

2. Level playing field through a fair tax and regulatorytreatment

� End of regulatory asymmetry

– Same regulatory context for telecom operators and OTT players to ensure fair competition

� Incentives to develop digital clusters around telcos and start-up companies

3. New digital growth areas

� Regulatory frameworkconducive to a balance between profitability, investment and competition

– EU support to invest in very high speed broadband networks

– End of termination rate asymmetry

� Fair taxation

– At least, a tax relief for industry-specific taxation and new rules for governance (Telecom Tax, TST, copyright levy,…), restrictions for taxes on new services (VoD and catch-up TV,…), no new taxes such as CNM, eBook,…

� Fair taxation

– Same calculation base for OTT players and telcos regardingindustry-specific taxes

– Taxation of OTT players in proportion of their effective business in France (IS, VAT, CVAE, accis project, …)

� Fair remuneration for usage of infrastructure by all players

� First-move in the usage of new technologies by public services (e.g. in NFC, eHealth

and eEducation)

� Training programs for technicians and engineers and communication campaigns to bolster attractiveness of digital jobs

� Continuation of Crédit Impôt Recherche (tax relief based on R&D expenditures) for digital businesses

Source: FFTélécoms


42

Survey on the “French Telecom Economics” - 2012 edition: key conclusions

� Telecoms are at the core of society and the economy.

– Demand and usage are growing fast.

– Telecom operators are the first private investors in infrastructure in France by far (€6.6 B per year) and haveinjected over €200 B in the French economy since 2006.

� Telecoms are a major driver in the development of the digital sector.

– Globally, the digital ecosystem is growing sharply (+49% since 2006) but Europe is lagging (+7% since 2006).

– Telecom operators generate the vast majority of investments. Meanwhile, device manufacturers and internetplayers capture more and more value.

– In France, telcos are the main contributors in terms of revenue (64%), jobs (77%), taxes (88%) and investments(92%).

� Telecom operators’ performance is sharply declining under regulatory, fiscal and competitive pressures.

– In France, revenues and margins have started to drop and the trend is expected to continue.

– This drop in performance is due to a combination of heavier regulation and taxation as well as strongercompetition.

– On mobile and fixed markets, French prices are now the lowest, when compared to the other four largestcountries in Europe and compared to the USA.

� To drive investment and growth in telecoms, it is paramount to re-build an ambitious and consistentindustrial policy in France and in Europe.

– Priority #1: Ensure and support continued investment in the telecom infrastructures of tomorrow

– Priority #2: Create a level playing field for competition and negotiations between telecom operators and globalinternet players

– Priority #3: Support the creation of new digital growth areas around telecom operators at the benefit of the“sectors of tomorrow”

43Présentation ERDF

50

Technology

Survey on the “French Telecom Economics” 2012 edition